An option gives its buyer a right, never an obligation, to buy or sell an asset at a set price by a set date. That single asymmetry — capped cost against a very different payoff shape — makes options a genuinely different tool from owning the stock outright.
A call option gives its buyer the right — not the obligation — to buy 100 shares of an underlying stock at a fixed price (the strike price) on or before a set date (expiration). A put option gives the right to sell instead. In both cases, the buyer pays an upfront fee, the premium, to the seller for that right, and can simply let the option expire worthless if it never becomes worth exercising.
That right/obligation split creates a defining asymmetry: the option buyer's maximum loss is capped at the premium paid, no matter how far the stock moves against them, while their potential gain (for a call) is theoretically uncapped. The option seller takes the opposite side of that trade — collecting the premium upfront, but carrying open-ended risk (for an uncovered call) or substantial risk (for a put) if the market moves sharply against the position.
An option's value at expiration comes down to whether it's in the money (would be exercised profitably), at the money (strike equals the current price), or out of the money (would expire worthless). A call is in the money when the stock price is above the strike; a put is in the money when the stock price is below the strike.
A hypothetical call option with a $100 strike price, bought for a $4 premium. Here's the buyer's profit or loss at different stock prices at expiration.
| Stock Price at Expiration | Option Value | Premium Paid | Buyer's P&L |
|---|---|---|---|
| $90 (Out of the Money) | $0 | $4 | -$4 (Max Loss) |
| $100 (At the Money) | $0 | $4 | -$4 (Max Loss) |
| $104 (Breakeven) | $4 | $4 | $0 |
| $115 (In the Money) | $15 | $4 | +$11 |
Below $100, the option is worthless and the buyer's loss is capped at the $4 premium, regardless of how far the stock falls. Above the $104 breakeven (strike + premium), the buyer's gain grows directly with the stock price — capped downside, open-ended upside is the defining shape of a long call.
Enter a strike price, premium, and a hypothetical stock price at expiration — see the buyer's profit or loss for a call or a put.
Model: call value at expiry = max(0, stock price − strike). Put value at expiry = max(0, strike − stock price). Buyer's P&L = option value − premium paid. Illustrative only — ignores commissions and any early exercise.
Answer all five, then hit "Check My Answers" to see how you did. Get one wrong? No problem — the explanation will show you exactly why.
Print-friendly resources to revisit, practice, and dig deeper — no login required.
You now know how an option pays off at expiration. Before expiration, its price moves for reasons beyond just the stock price — the next lesson breaks down exactly what drives that.